All posts tagged Government Debt

If you were a populist politician in Italy, you could probably generate a lot of noise about Italy’s huge gold reserves. There they are, the third largest national gold stockpile in the world, and you need the permission of the European Central Bank’s governing council in Frankfurt to do anything with them.

There are people, judging from my Twitter feed, who think it would be a travesty to use them to help ease Italy’s financial travails because it’s “monetary gold,” which raises the question of what 2,450 metric tons of the inert yellow metal held by the Bank of Italy is actually for. (This is the amount left after Italy’s contribution to the ECB’s own capital, 15% of which has to be in gold.)

The process of imposing losses to private-sector holders of Greek debt–known as private-sector involvement or PSI–has dogged policy-makers for months. If the Greek finance minister is to be taken at his word, the first large-scale restructuring of sovereign debt of the euro area is nigh.

But the real question is not whether Greece will reach a voluntary agreement with its creditors, but by how much the deal will ease its debt burden. What follows is an analysis of creditor groups that may threaten the process and what a shortfall in the hoped-for debt reduction would mean. Read More »

Many analysts have been pessimistic about the likely success of efforts to lower Greece’s debt burden by restructuring its government bonds.

But a new paper by financial-law academic Mitu Gulati and Jeromin Zettelmeyer of the European Bank for Reconstruction and Development, published today, puts a, sort of, positive spin on the gloom over Greek “private sector involvement” or PSI.

Messrs. Gulati and Zettelmeyer build an elegant model that calculates what it will take for private creditors to participate voluntarily in the Greek restructuring deal and therefore make PSI a success.

The two conclude that success is within reach if creditors perceive a 50% or higher probability that Greece will be forced into or opt for another debt restructuring in the medium-run. That second restructuring will probably not be voluntary. Read More »

At their summit last night, European Union leaders provided the answer to a question we asked earlier this week. Of that more below. But now we have another question: How can the European Stability Mechanism be both a preferred creditor and a buyer of government bonds in the primary market?

Let’s back up a bit. Close followers of this topic will recognize that the euro-zone leaders have agreed that the ESM, the bailout vehicle that starts operating in 2013, should have precedence in the event of a borrowing country defaulting over other run-of-the-mill creditors such as holders of that government’s bonds. (That’s in contrast with the bailout fund that’s currently in place.)

That’s the definition of a preferred creditor, a status that custom appears to have granted to the International Monetary Fund. Actually, the proposal is for the ESM to be a bit less preferred than the IMF, a sort of business class to the IMF’s first class. Read More »

John Maynard Keynes famously wrote that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood… I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

It’s an observation that seems particularly astute now, possibly explaining why European leaders are stoutly defying some of society’s most powerful vested interests –- labor unions, pensioners and others -– in their push to slash deficits, even as unemployment remains high and growth weak.

So, what ideas are driving Europe’s move toward austerity in the face of stiff public opposition?

Here’s one that Olli Rehn, the man in charge of economic policy at the European Commission, cited yesterday during a press conference, based on research by the U.S. economists Carmen Reinhart and Kenneth Rogoff. “It is a conclusion of Reinhart and Rogoff that when [government] debt reaches 80-90% of GDP, it starts to crowd out activity in the private sector and other parts of the economy,” Rehn said.

This is one of those ideas that may turn out to be powerfully wrong. Read More »

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The Wall Street Journal’s Brussels blog is produced by the Brussels bureau of The Wall Street Journal and Dow Jones Newswires. The bureau has been headed since 2009 by Stephen Fidler, who was previously a correspondent and editor for the Financial Times and Reuters. Also posting regularly: Matthew Dalton, Viktoria Dendrinou, Tom Fairless, Naftali Bendavid, Laurence Norman, Gabriele Steinhauser and Valentina Pop.